Open up your to-do list for the day, and here it is, the item you've been ignoring for weeks or even months. It says, "Finish Your Tax Planning for the year." And today is the last day to file investment proofs. If you can relate, know that this laziness with tax planning can lead to costly mistakes. Expensive mistakes that cost money in the long run: inefficient investments, tax penalties, etc. So today, we will understand some of the major mistakes in tax planning and how you can save yourself the trouble going forward. Below are some costly mistakes to avoid in tax planning.
Not educating yourself about taxes.
The most valuable investment you can make is investing in yourself. No, we are not asking you to study for hours and become a tax specialist. What we are emphasizing is learning so that you have basic knowledge so that you can help you. Think of it as an investment.
To start, take a little time each weekend and start reading articles on taxes. Gradually, over 2 or 3 months, you will see the difference. You will have more confidence in your tax options.
And you can also impress other people with your tax knowledge in your office. It's not a bad deal, is it?
Waiting until the dying minute to do the tax planning
It is risky if you keep doing this.
Risky because you will invariably turn to your next cabin colleague for tax advice on the last day of tax planning. Also risky because you will follow him blindly and make investment mistakes that you will pay, not him!
In the future, you will find yourself burdened with bad investments for which you will not blame anyone other than yourself when it happens. So be smart and proactive with your tax planning.
Not being clear about your financial goals.
These days there are many options when investing to save taxes. If you are not sure what your NEEDS are, it is like a maze that can be very confusing.
Don't plan your taxes to save taxes. It should also help you plan your financial goals and increase your wealth. For example, to need money to buy a house in the next eight years, YOU CANNOT invest in a plan with a 15-year lock-in period, or a 30-year retirement plan, or invest in a poorly performing and tax-saving investment. This will turn out to be a bad choice.
Follow this three-step approach:
Learn and educate yourself about personal finances
Make a list of financial goals
Invest according to the financial objective
Investing without having the right clarity on the product
In addition to the financial goals, you should also assess a possible tax-saving investment based on the following parameters:
Liquidity: Does it just mean that when you need money for financial purposes, you can withdraw it? Is there a period of interruption? Are there any criminal prosecutions for early withdrawals?
Risk: Some investments are inherently volatile, like stocks, but can offer higher long-term returns to beat inflation. However, you must ask yourself: am I comfortable with tolerating some volatility? How much capital can I invest and sleep peacefully at night?
Taxes: People only control the tax benefit at the time of investment. But you should also check things like income tax and maturity income tax, and early retirement tax. This will give you a holistic perspective of the overall tax efficiency of your investment.
Sticking to old and ineffective tax-saving methods
When it comes to tax planning, many people unknowingly adhere to the legacy of their parents and grandparents. As a result, their investment portfolio tends to become underperforming in investments.
The financial scenario we live in is very different from that of our parents. Job security no longer exists, families think of the past, and inflation is in double digits for a child's education.
In this context, these so-called "safe" means are really risky because they do not beat inflation. You also end up losing new ways to save taxes like mutual funds and IRAs. So get out of the old mindset, do your research, and invest.
Lastly, do not forget to consult a tax professional for tax planning advice.
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THANKS FOR VISITING.
Dennis Jao